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Unformatted text preview: 383 Chapter 23 Income Taxation of Trusts and Estates SUMMARY OF CHAPTER The first part of the chapter discusses the taxation aspects of estates, focusing on a decedent’s final federal income tax return, while the second part of the chapter reviews the federal income tax return of a trust. Intertwined in the discussion of estate and trust income tax returns is a discussion of the duties and responsibilities of fiduciaries. Tax planning techniques which have proven useful in regard to estate and trust income tax returns and the tax status of beneficiaries are also discussed. Taxation of Estates ¶23,001 Decedent’s Final Income Tax Return Decedent’s final income tax return includes income and deductions up to the date of death. The return is filed on the regular due date. ¶23,015 Income and Deductions on Final Return The method of accounting used by the decedent while alive determines what income and deductions are recognized on the decedent’s final return. Medical expenses incurred for care of the decedent and paid by the estate within one year of death can be treated as paid at the time they are incurred and deducted on the decedent’s final return. Income in respect of decedent includes income that the decedent has earned or is entitled to receive at the date of death but which is not properly includible on the decedent’s final return. Income in respect of the decedent is included on the income tax return of the estate or the beneficiary who is entitled to the payment and actually receives it. ¶23,025 Federal Income Tax Concerns of an Estate An estate comes into existence on the date of the decedent’s death and continues in existence until all of the decedent’s property is distributed to the beneficiaries and the estate is dissolved by law. ¶23,035 Fiduciary Responsibilities A fiduciary is a person such as an administrator, trustee, or executor who has been given a special confidence and responsibility to manage property in a trust or estate according to some legal document (will, trust agreement) and in the best interests of the beneficiaries of the trust or estate. The main responsibility of a fiduciary of an estate is to settle the affairs of the decedent. Included among the duties and responsibilities of a fiduciary of an estate is the responsibility to file any required tax returns and pay any tax liabilities of the decedent or the decedent’s estate. ¶23,045 Estate Federal Income Tax Return An estate is a taxpaying entity that is entitled to a deduction for income distributions to beneficiaries. The estate is entitled to a personal exemption of $600. Taxation of Trusts ¶23,209 Nature of Trusts A trust is a legal entity created to hold property. As a taxpaying entity, a trust is entitled to a deduction for income distributions to beneficiaries. For tax purposes, a trust can be classified as a simple or a complex trust. A simple trust is required to distribute all income currently. All trusts other than simple trusts are complex trusts....
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